Three Countries Facing Shrinking Populations: ETFs at Risk?

As the world population continues to expand at a tremendous pace, investors have begun to see the impact of this growth on a host of finite resources, including food, water, and other assets critical to modern life. With the world population increasing by nearly one billion people every 12 years (it stood at just 5 billion in 1975), it may be surprising to find that a number of countries will be experiencing significant population declines in the coming years despite massive gains in a variety of nations around the world.

According to the Population Reference Bureau, about 25 nations that currently have more populations greater than one million will contract considerably (by more than 7%) by 2050. While a shrinking population can reduce the resource strain that rapidly-expanding countries must combat, this trend can have some very negative ramifications for investors. A shrinking population obviously erodes the consumer base, meaning fewer buyers of goods and services. Moreover, shrinking populations are often aging populations, which means that the workforce is reduced even further.

Below, we profile the three country-specific ETFs that could face headwinds created by a shrinking population going forward. All three are projected to see their populations drop by more than 13% between now and 2050, thanks to dropping birth rates and emigration that are spurring some of the largest natural population declines in human history. While it’s tough to predict how significantly these demographic trends will impact equity markets, it will be certainly be a challenge for governments to deal with this unique issue at a time that much of the rest of the world is seeing surging growth.

South Korea

Probably a big surprise to most people, the tech-savvy country of South Korea will see a huge population decline in the coming years as the number of its citizens shrinks from close to 49 million today down to 42.3 million by 2050 (a 13.4% decrease). This comes despite the country’s positive gains in immigration thanks to its fertility rate of just 1.2 children per woman, among the lowest in the world.

One way to play the South Korean economy is with the iShares MSCI South Korea Index Fund (NYSEARCA:EWY), which tracks the MSCI Korea Index. The fund holds 102 securities in total while making heavily allocations to the hardware and industrial materials sectors, which combine to make up close to 43% of the fund’s total assets. The fund charges an expense ratio of 63 basis points and has has surged higher by about 15% over the past year.

Poland

Poland is expected to see its population decline by 16.6% over the next 40 years thanks to an extremely low fertility rate and a lack of immigrants. Furthermore, Poland will only have two working people for each retired person by that time, potentially putting a significant strain on the country’s finances and health systems. For investors interested in betting on how this trend plays out in the Polish equity markets, two ETFs offer direct exposure: the Market Vectors Poland ETF (NYSEARCA:PLND) and the iShares MSCI Poland Investable Market Index Fund (NYSEARCA:EPOL). Both funds offer investors exposure to roughly 30 companies with large allocations going to financials and energy companies. Both charge an expense ratio of 65.

Japan

The country expected to see the biggest population decline is Japan, which will see the number of its citizens shrink from 123 million to just over 95 million, a drop of over 25% in 40 years. There are numerous ETFs to play the Japanese economy; by far the most popular is the iShares MSCI Japan Index Fund (NYSEARCA:EWJ), which has more than $4 billion in assets under management and has an average trading volume of 21.5 million shares.

This fund holds over 300 stocks and is tilted towards giant and large cap companies. From a sector perspective, the biggest weightings are in consumer goods and financial sectors. Times have been tough for Japan and this fund; EWJ has fallen by about 8% over the past 52 weeks and by 4% or so in the last month alone thanks to a stronger yen and weak growth prospects.

Shrinking Populations: Good Or Bad?

While a shrinking population generally isn’t welcome news for investors seeking to capitalize on a booming middle class, a smaller population can make providing services easier for overburdened governments. That could be especially true in the crowded nations of South Korea and Japan, which are home to two of the most densely populated capitals in the world. Meanwhile in Poland, a smaller population is likely to allow the country to better serve its citizens and concentrate its development as it continues to progress towards developed status. However, this trend could also prevent some of the best and brightest from staying in the country, as young people will likely leave in droves for countries with a more dynamic demographic profile.

Disclosure: No positions at time of writing.

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